Day trading of digital currencies

Since the digital exchanges are not linked to each other, there can be variances in the prices of the same asset across the exchanges. This causes one digital currency to sell at a high or low price on an exchange compared to another. These discrepancies can be much greater on cryptocurrency exchanges than they are on other asset exchanges. Being able to take advantage of these spreads is an excellent way to profit when day trading cryptocurrency.

Cryptocurrency exchanges differ in terms of their fee structures. Most exchanges charge a fee per trade, with a fixed percentage or cash fee. These fees vary depending on your position in the trade i.e. either as a maker or as a trader, and the makers’ fees are often lower in order to incentivize them to add liquidity to the market, which in turn can attract new traders to the market. Fees are often reduced based on trading levels centered around the 30-day trading volume. The fees paid by traders at the top tiers can be a small fraction of the fees paid by traders in the entry level tier.

You may also have to pay fees for deposits and withdrawals depending on the exchange. The cost of this fee can vary, but can be as high as 5% of deposit or withdrawal requests on some exchanges.

In any market, there are two parties trading assets with each other, the market maker party who places a limit order in the market and the executing party who initiates the transaction. Many of the orders in the order book come from professional market makers, who provide liquidity to the market as they update their prices based on market activity in each period. A group of makers usually consists of professionals who rely on computer algorithms to update and manage orders, operating at a higher level of sophistication than the average day traders. But many limit orders are market sellers hoping to get a better price or pay lower fees.

On the other hand, the other side is a day trader who is looking for liquidity and executing a trade quickly. Market buyers also want to get the best possible price for the trade.

A market order is a basic order type that immediately executes a trade based on the current available price. As for the limit order, it is executed when the trader determines the price at which he wants to buy or sell. The order is executed once the previously specified price is reached. Traders can often set different limit orders such as buy limit, take profit, buy stop and sell stop orders.

Stop-loss orders are also an important tool that every day trader should make use of. A stop-loss order limits the losses of any trade by automatically selling the digital currency as soon as it drops below the specified price.

While we like to think that the markets are 100% efficient, in fact they are not. As a result, there are ample opportunities to take advantage of price discrepancies across different financial markets and products as a way of reaping profits. Arbitrage is a method of trading in which day traders profit from price differences and profits from short-term trades between markets or products.

Since cryptocurrencies are a fragmented and relatively undeveloped asset class, there is still a large amount of arbitrage opportunities for cryptocurrency traders that can be taken advantage of.

Pricing across various cryptocurrency exchanges is rarely consistent. And unlike a regulated stock market, cryptocurrency exchanges are not directly linked to each other, and thus prices are determined by supply and demand levels on a particular exchange. Thus, these prices can fluctuate based on the exchange, its user base, and more.

There is also the opportunity to arbitrage across various cryptocurrencies on the same exchange. Traders can identify price differences from one trading pair to another, and see the opportunity to profit by taking advantage of dips in the prices of the same cryptocurrencies on the same exchange. This often requires trading in and out of various digital currencies in order to take advantage of arbitrage across existing digital products.

Cryptocurrency day traders may rely on the more sophisticated strategies of “statistical arbitrage,” where price relationships are modeled on historical data and then traded on divergence.

Spot trades are made with physical asset exchanges, while derivatives are financial instruments whose values ​​are derived from and dependent on spot prices.

Futures contracts are the most traded derivatives and they reflect a standardized agreement to trade an asset at a future date. With the growth of the cryptocurrency industry, exchanges are starting to provide more futures trading opportunities that did not exist before. Exchanges such as CME and Bakkt offer their clients Bitcoin futures trading opportunities instead of spot trading opportunities. The difference in price between futures and spot trading can come from the cost of holding as well as the differences between the bid and ask levels. The cost of holding a purely financial instrument like Bitcoin is determined by the risk-free rate of return over the holding period.

Other derivatives such as perpetual swaps and options have become increasingly popular in recent years, but they also carry with them more complexity that a trader should make sure they understand well before starting to trade them.

Cryptocurrency charts can be read in the same way a day trader would read the charts of any other asset. Technical analysis takes into account the asset’s price history and its key indicators to predict future price movement. Many exchanges have advanced charting tools like trend lines and moving averages, which are very useful while doing technical analysis.

Regulation plays a major role in maintaining the security and integrity of the cryptocurrency trading market. As discussed earlier, security is one of the major considerations that traders make while choosing a suitable exchange to place their funds on.

Digital currency regulations in the US are not well established, but both regulators and market participants are constantly improving clarity. With the federal government failing to provide adequate regulation, each individual state in the country introduced a raft of legislation aimed at regulating all firms in the industry. Many market participants want to avoid the need to register as brokers and dealers because this carries a significant legal and regulatory burden, so they are always careful not to engage in transactions that would expose them to securities law or get involved with products that fail the “Howey” test. Rating of many Some of the most popular cryptocurrencies, such as Bitcoin and Ethereum, are classified as commodities rather than securities. Large US-based exchanges such as Coinbase have done their due diligence to deal with this.

There are certain regulations that all cryptocurrency exchanges around the world adhere to – including anti-money laundering (AML) and customer wellness programs – which aim to confirm the identity of their customers and ensure that anyone involved in illegal activity is prevented from participating in the market.

There are varying degrees of regulation of digital assets around the world that vary by country. For example, cryptocurrency-friendly countries like Switzerland regulate initial coin offerings, trading operations, and other currency-related businesses. While some few countries such as Morocco, Bolivia and Vietnam have banned the use of all digital currencies, regardless of their function.

An exchange’s ability to execute trades quickly and at fair prices is all about the quality of execution. While the speed of trade execution can be measured fairly objectively, price quality is difficult to measure. Tight spreads between bid and ask levels, high volume in the order book, and prices compatible with other exchanges’ prices will all lead to high execution quality along with the price. Execution quality is a critical factor when determining whether one can be successful in cryptocurrency trading.

There has been a lot of controversy about how digital currencies should be treated in the eyes of the IRS. In 2014, the IRS recognized that Bitcoin and other cryptocurrencies are considered “intangible property” and not currency. Cryptocurrency trading is currently subject to capital gains tax similar to stocks. Thus, day traders in the cryptocurrency market will be subject to a short-term capital gains tax on their trades.

When starting to day trade cryptocurrencies, traders should never risk more capital than they can afford to lose. Doing so will definitely put you under some financial stress. When evaluating trading opportunities, day traders should keep in mind the 1% rule, which states that no more than 1% of trading capital should be risked on a single trade. This helps spread the capital across several deals and reduces the risk in the event that one deal goes badly.